No one is disputing that the Irish Banks were insolvent and became increasingly dependent on the ECB for funding. They should have been put into receivership, with the shareholders wiped out and the bondholders receiving, at best a share of the remaining business.

However the ECB refused to allow that option for fear of the contagion that would spread throughout Europe if the Irish banks were allowed to default/fail/ go bankrupt. The Government was panicked/forced to go along with this by the ECB threat than any reconstituted banks would also not be allowed to participate in Euro funding mechanisms and that thus the ATMs would cease to function and general public panic would set in.

Of course the Irish Government was also grievously at fault - Stephen Donnelly doesn't dispute this - first in believing the banks spiel that their's was a liquidity rather than insolvency problem, and then in issuing a far too broad bank guarantee. However it never made any sense for any Irish Government to spend 35 Billion or so rescuing Anglo-Irish bank - it was obviously insolvent from the get go, was purely a developers/speculators bank, and had no retail presence or ATMs and was not of immediate systemic importance to the Irish economy.

>However the ECB refused to allow that option for fear of the contagion that would spread throughout Europe if the Irish banks were allowed to default/fail/ go bankrupt.<

When?

>The Government was panicked/forced to go along with this by the ECB threat than any reconstituted banks would also not be allowed to participate in Euro funding mechanisms and that thus the ATMs would cease to function and general public panic would set in.>

When was that supposed to happen?

Give me a timeline.

As far as I remember the guarantee was a very own irish invention, nastily surprising the rest of europe, including the ECB.

And this now very popular distinction between bad anglo-irish and the good other banks is very much a distinction made much later.

According to Patrick Honohan, the governor of the Central Bank of Ireland, appearing on Tonight with Vincent Browne, that would be September 2010. At least if I am understanding correctly which part of bank guarantees you are talking about.

PH: Yeah, let me make that clear. It was, the magnitude of the cutbacks was negotiated in Brussels[beforehand], but not in the context of the programme. It was negotiated, I can't remember precisely the date, it was sometime in September I would think, probably September. When they said "this will do it, this will allow you to be compliant with the excessive deficit procedure" It wasn't in terms of the programme but that was negotiated. And by the time the EU/IMF discussions were held, there was a question "oh, well maybe it should be tougher" but the answer was "no, that's what's been agreed". We just stay with that.

VB: He seemed to me that he was crestfallen after that thing had happened.

PH: Yes. I think he had expectations. I think we all had expectations that we would discuss this over a longer period of time, that we would come up with something more sophisticated in terms of a financing programme that would have more of a risk-sharing element. But instead it was a sort of plain vanilla, "yeah, continue what you're doing, we'll give you money for two years, and you'll convince the market"

VB: And then of course that- On top of the EU/IMF deal they said to you that in addition to that you cannot default on even the unguaranteed debts of the banks.

PH: I think that's the main reason he was crestfallen.

[moment of silence]

VB: And why did that -

PH: It wasn't part of the negotiations as such. There was no deal. There was no agreement on that. But there was talk around, about that [gestures circular movement with hands] And eventually the decision was [resolute tone] "No". I think he was quite discouraged by that.

VB: Was there no room for us to say "Well sorry, we're not going to finance the unguaranteed debts"

PH: It's not in the agreement. It's not in the agreement. I mean you know the way the world works. There's political room. There's no political room. No political room was offered to him by the people.

Unfortunately, when pressed on what the alternatives were, Honohan evades teh questions.

Your contention is that Ireland could have defaulted between 2008 and 2010. Implicit in that contention is the claim that the ECBuBa would not have blackmailed Ireland with the threat of refusing rediscount facilities to Irish banks following an orderly default and dismantling of insolvent banks in 2008-10.

Their behavior towards Greece is evidence that the ECBuBa would, and that Ireland therefore did not have the option to default in 2008. That it did not attempt to exercise that non-existent option until 2010 does not magically make the ECBuBa unprepared to deny the option in 2008 - as all available evidence suggests that they would have.

The evidence is that they would have threatened to cut off liquidity. Is there evidence that they would actually have done it?
I doubt the Irish government needed convincing in 2008. At least they very much owned the policy. Up to suggesting that everyone should move their deposits to Irish banks.

Well, the Irish bank guarantee in 2008 happened after Lehman and was more of less simultaneous with Dexia, Fortis and Icesave. I'm not sure the ECB had any particular role in forcing the governments of France, Belgium and the Netherlands to bail out Dexia and Fortis.

What we do know is that Iceland got applied the anti-terrorist act and had its state assets seized by the UK for refusing to guarantee nonresident deposits.

The ECBuBa couldn't have vetoed a restructuring of Dexia and Fortis without threatening to withdraw rediscount facilities from banks and assets that had never been restructured.

In the Irish and Greek cases, the threat of withdrawal of rediscount facilities from banks that had been restructured amounted to a threat to withdraw rediscount facilities from the entire banking system.

The real issue is that, without a proper banking resolution scheme in place (and Europe - or the member states - by and large doesn't have one now, let alone 4 years ago), the ECB cannot withdraw support from a bank without causing a crash.

And "proper resolution scheme" for banks means being able to summarily restructure a bank without going through bankruptcy court. The FDIC has been doing that for 80 years, and making that possible in 1933 is what allowed the 1930s financial crisis to touch bottom (the real economy was a different matter, but it also touched bottom in the first year of the Roosevelt administration).

Question: Would it be legal - meaning allowed by the relevant treaties and rules governing the ECB - for the ECB to withdraw rediscount facilities from banks, because the government of the state they are established in, refused to follow a particular fiscal policy?

In other words, Draghi basically acknowledged the concern Wadhwa raised about political leverage by saying that it was justified in pursuit of the repair of monetary policy. And the monetary transmission mechanism is, of course, an ongoing concern.

The upshot is that it should be perfectly clear now that if the ECB's intent is to repair the mechanism, it is more than willing to discard notions of popular sovereignty to do it.

So, it may be reasonable to expect the ECB to wield more of its influence in Europe going forward as democracy becomes increasingly subverted by supranational policies and negotiations.

"Your contention is that Ireland could have defaulted between 2008 and 2010. "

The popular contention in Ireland right now is that the irish government now and back then wants to default on unsecured senior debt of certain banks, namely Anglo-Irish. But the ECB somehow doesn't permit that.

I tend to point out that this is a myth. In 2008 the Irish government happily guaranteed everything in any bank, forcing the rest of Europe to follow suit. Nobody talked about defaulting on unsecured senior debt then and nobody differentiated between good "pillar banks" and evil anglo-irish then.

Even if in September 2010 a non-default on unsecured senior debt was a condition, that still leaves two years.

so my contention is: Ireland had two years to default on unsecured senior debt in aglo-irish and irish nationwide.

And I'm saying that unless you want to argue that Ireland Is Not Greece, it had at the very most only one year, since the ECB is on record blackmailing Greece since early 2009. And I have no particularly compelling reason to believe that it was an option that Ireland could have actually exercised in 2008, without running into a wall of scurrilous blackmail from the ECB.